Another day, another breathless Kudlow report on trade talk progress.  At the open, SPX will have risen almost 6% since the Phase One deal agreement was announced.Thanks to Kudlow’s and Trump’s frequent updates, USDJPY and CL’s continuing ramp jobs and the incessant assault on VIX, the market can do no wrong.

Unfortunately for the bulls, ES is back to the top of a rising channel and this latest move should be faded.  The most interesting trade, however, is coming up in the oil market.

continuing…

The yellow channel top intersects here with the red channel top and the white channel top.  In other words, lots of overhead resistance for ES.The view from VIX and USDJPY.  More of the same from VIX…A belated bounce from USDJPY which will need to clear the white channel top in order to keep things from deflating today.

The big picture for SPX, which will need to be adjusted once the reversal is in.And, some interesting views of CL…  We’ve talked about the daily poke above the SMA200 which has been going on since Nov 4.

But, it’s really been going on since Jun 26.  Soon after CL first broke below its SMA200 on May 23,  SPX fell below its. It was saved on Jun 4 when Powell and Bullard publicly opened the door to rate cuts. SPX gapped open and closed 60 points higher.

CL bottomed the next day and soared 20% over the next three weeks. Since then, it has been at or near the SMA200 almost every day with two key exceptions. It tumbled on Aug 1 after the Jul 30-31 talks ended without any progress. SPX sold off almost 200 points.The next breakdown began on Sep 27 in the wake of failed trade talks and the attack on Saudi oil facilities was determined to not be all that serious.  Oil and USDJPY both bottomed on Oct 3 because that’s what the market needed in order to hold the purple trend line (a potential IH&S neckline.)Up until this point, our analog was still on track. The bounce at that point, however, put SPX back in a position to break above the red TL from Sep 19. It faltered again, failing to push above any resistance until Oct 11 when the Phase 1 deal was announced.

Once the TL was broken, SPX would never again even fully backtest its SMA10. It broke above its 2.618 extension on CL’s 5% pop on Nov 1 and subsequent daily threat to break above its SMA200…

…which has been accompanied by VIX’s daily threat to break down below the TL from Nov 2017. It’s happening again today.Looking back, the analog was generally working up until Oct 3.  Had it dropped a little further and slightly overshot the SMA200, we would have considered it on course. As mentioned above, ramps USDJPY and CL, the continual assault on VIX and periodic announcements by Kudlow and Trump have enabled a meltup through all resistance so far.

The oil element of the equation, though, is unlikely to continue much longer. VIX’s manipulation doesn’t have much impact on the real world. USDJPY’s ramp jobs, especially if they unwind after the assist to stocks is provided, are likewise not all that consequential. Lately, they have mostly been a threat to break out rather than an actual break out. And, Japan has the headroom in interest rates to handle a slight bump in CPI.

Oil’s rallies, however, have sudden and significant impact on real world economics. Because rising oil and gas prices produce increases in CPI, interest rates are very quickly impacted.As we discussed a few days ago [see: Because Appearances Matter] everything has been going okay on the inflation front until now.  CPI has stayed under wraps, as RB’s YoY price comparisons have been negative. In November, however, that will likely change.  If RB doesn’t decline significantly, CPI will most certainly top 2% in December.Aug, Sep and Oct CPI came in at 1.75%, 1.71% and 1.76% as the YoY drop in gas prices averaged about 10%. In Nov 2018, however, gas prices plunged in the wake of the Khashoggi assassination.  As the chart above shows, RB has not dropped so far in the month of November.

The EIA reported 2.561 for Nov 2018.  The current average for the month is about 2.60, a slight increase. In the absence of a 10% decline as we’ve seen in previous months, CPI will increase substantially. The problem will get worse in December, when the YoY comparison will be against Dec 2018’s 2.263. At current levels, this would result in a 15% YoY increase.

The only way to prevent such an increase would be for RB to decline sharply in the next 6 weeks.  A failure to do so would result in a rise in CPI and, therefore, interest rates. The chart below shows the impact such an increase might have on CPI.  It would almost certainly top 2%.

An increase over 2% would almost certainly push interest rates higher at a time when the market’s health — not to mention US and global fiscal health — depends on the continuation of low rates.This brings us to the point of this discussion. Very soon, TPTB will have to choose between high oil and gas prices (which produce high inflation and interest rates) or low oil and gas prices (which produce low inflation and interest rates.)  I think it’s safe to say they’ll choose the former and will ensure prices that prices drop as soon as possible.

The timing is pretty clear: the Aramco IPO – which is slated to begin on Nov 17 and continue until Dec 4.  November CPI will be announced on Dec 11 and December CPI will be announced in mid-January.

In order to completely avoid any increase, gas prices will need to decline to an average of 2.30 in November and 2.03 in December. A modest increase in CPI to 2.0% could be accomplished by driving gas prices down to about flat YoY — roughly 2.26 in December. Given the timing of the Aramco deal, November is likely going to come in hot – meaning no rate cut at the Fed’s Dec 11 meeting (same day that Nov CPI is released.)

The market could react badly; but, we know that USDJPY and VIX could still be employed to keep it afloat a couple more weeks.  If not, it’s worth noting ES just officially reached the top of the rising white channel in place since May. But, the better bet is that once the Aramco deal is done, oil and gas will sell off in order to put inflation and interest rates back in the box.

My target (monthly average) for RB in December is therefore 1.38.  If it breaks below 1.24, it has potential all the way down to 1.08.  For CL, assuming it can get through 50, I’m staying with 45.12.

GLTA.